Great expectations – Being “OK” even with moderate 15-20% annual returns

In one of the recent discussions I had, I heard an offhand remark, something like – “Even if stock markets give just 15-20% returns per annum, I am OK with it.”

How many of us, especially the ones who haven’t seen too many downs in the stock markets think so? How many of us think that it is OK to take a debt/ loan (real/ virtual) put money in equity markets because we have been promised “assured” returns, which is like 15-20% according to conservative estimates. And how many of us think that this recent bull run will continue till eternity?

Optimism is a good thing. But does it mean that we ignore the possible caveats?

Return on Investment -

It may happen that the person who quoited the above will able to get more than “OK” returns, as he defines it. It may be possible that the returns will not be much “OK” or even not at all “OK”.

Most of us can’t predict the future. Sure, there are many people who claim (some of them probably rightly!) to be making tons of money trading in equities/ Futures and Options and a, and claim to know it all about the future. But I’ll be wary of people who can “accurately” predict the future, and more so people who can predict it will >110% accuracy! As I shared in my earlier post(s) markets may, say, in next 10 years give 20% annualized returns or 12% or zero returns, or even negative 20 percent returns. There are many possibilities, and one may not probably be able to make a very accurate prediction. And if one does, it would have required a generous dose of luck. While it is true that there are lot of things that are under your/ companies’ control, there may be many more which are not.

What if a black swan event happens, as Nicholas Taleb argues in his eponymous book?
Say your country goes in a war?
Or a really bad recession happens?
Or weather conditions change for the worse having its impact on the entire world?
Or a major technological disruption makes many of the conventional businesses irrelevant?

I am not a crystal ball gazer, nor intend to be one. But I do believe that while it is good to be optimistic, it is also good to be aware of the possible risks while making (great) assumptions about the returns. And it may be a good idea to diversify little bit.

What do you think?

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Originally published here

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